Financial Stability Effect of Yield-Oriented Investment Behaviour

59 Pages Posted: 9 Oct 2018 Last revised: 2 May 2019

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Michael Schmidt

Deutsche Bundesbank; Goethe University Frankfurt

Date Written: April 22, 2019

Abstract

We examine the effect of low interest rates on bond portfolio and market allocations by all institutional investors and households across all bond types in Germany at the security-level for 2005-2016. We find that―in contrast to banks―non-banks tilt bond portfolios significantly towards riskier assets when interest rates are low. Importantly, we show that these portfolio allocations are associated with increased individual downside risk and substantial shifts in market-wide bond allocations. We use the 2015-Bund tantrum as a quasi-natural experiment to assess implications of these market-wide shifts for financial market outcomes in response to sharp yield reversals.

Keywords: Portfolio allocation, fixed income, yield reversals, financial stress, financial stability

JEL Classification: G11, G23, E43

Suggested Citation

Abbassi, Puriya and Schmidt, Michael, Financial Stability Effect of Yield-Oriented Investment Behaviour (April 22, 2019). Available at SSRN: https://ssrn.com/abstract=3250799 or http://dx.doi.org/10.2139/ssrn.3250799

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Michael Schmidt

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 4
Hauspostfach 64
Frankfurt, 60629
Germany

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